According to a Bloomberg report, traders of Treasury notes are betting that the Omicron variant will only apply more inflationary pressure, which supports the case of Treasury inflation-protected securities (TIPS).
“U.S. 10-year break-even rates — which are market estimates for the average rate of inflation over the next decade — climbed to as high as 2.65% on Tuesday, the most since November, and up from as low as 2.36% on Dec. 14,” Bloomberg reports. “The extra yield on Treasury 10-year notes over two-year securities also jumped, indicating the bias may be switching back to a steeper yield curve.”
“Inflation continues to be the major theme of the market given life with the coronavirus,” said Makoto Noji, chief currency and foreign bond strategist at SMBC Nikko Securities Inc. in Tokyo.
2 ETF Tips for TIPS
A pair of ETFs from FlexShares offer appealing solutions to ward off inflation. These are the FlexShares iBoxx 3-Year Target Duration TIPS Index Fund (TDTT ) and the FlexShares iBoxx 5-Year Target Duration TIPS Index Fund (TDTF ).
As consumer prices move higher this year, fixed income investors can brace themselves for any further moves with Treasury-inflation protected securities (TIPS). However, for the discerning fixed income investor who wants to limit their duration in TIPS in the event that consumer prices come down, TDTT and TDTF can accomplish just that.
“Protecting against inflation is a popular investment strategy for many investors,” a FlexShares Fund Focus says. “And in their pursuit of inflation-hedging investments, Treasury Inflation-Protected Securities, or TIPS, often are investors’ top choices.”
“However, investors using TIPS must consider these securities’ duration—a key measurement of sensitivity to interest rate movements,” FlexShares says. “We believe that targeting a specific duration based on a portfolio’s interest rate exposure is key to successfully protecting against the threat of inflation. That being said, TIPS present more challenges to managing duration than most other fixed-income investments.”
First up, TDTT seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the iBoxx 3-Year Target Duration TIPS Index. The underlying index reflects the performance of a selection of TIPS with a targeted average modified adjusted duration, as defined by the index provider, of approximately three years.
The second option, TDTF, seeks to provide investment results that correspond generally to the price and yield performance of the iBoxx 5-Year Target Duration TIPS Index. Like TDTT, the underlying index reflects the performance of a selection of TIPS.
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